Coinbase, a top cryptocurrency exchange, is launching an index fund

One of the world's top cryptocurrency exchanges is opening up a new way for investors to seek a return on digital currencies such as bitcoin — by launching an index fund that tracks four of the biggest virtual currencies on the market.

Known as the Coinbase Index Fund, the basket of cryptocurrencies resembles traditional index funds that mimic the performance of the S&P 500 or the entire stock market. It marks the first time that Coinbase, the San Francisco-based cryptocurrency trading platform, has leaped into asset management.

“Index funds have changed the way that many people think about investing,” Reuben Bramanathan, a product manager at Coinbase, said in a blog post Tuesday. “By providing diversified exposure to a broad range of assets, index funds enable investors to track the performance of an entire asset class, rather than having to select individual assets.”

Previously, investors who wanted to buy into the cryptocurrency craze would use Coinbase to exchange U.S. dollars for individual currencies, similar to the way equities investors buy stock in specific companies. But the new Coinbase fund will allow investors to hold virtual currencies indirectly through shares; the fund is composed of 62 percent bitcoin, 27 percent ethereum, 7 percent bitcoin cash and 4 percent litecoin, in accordance with their relative market caps. The fund is expected to add other coins in the future, and its allocation will be rebalanced every year.

The rise of index investing in cryptocurrency mirrors the fast-growing popularity of index funds in other types of assets and shows the maturation of the cryptocurrency ecosystem, industry experts say. Much of the shift has been driven by research showing that actively managed mutual funds — in which a portfolio manager tries to beat the market with well-timed bets — rarely outperform funds that charge lower fees and simply try to stay abreast of an index. A 2015 Morningstar report found that between 2004 and 2014, actively managed funds almost universally underperformed compared to their passive competitors.

Coinbase's announcement comes at a time when regulators have cautioned investors about the budding virtual investment world. On Wednesday the Securities and Exchange Commission said that more online exchanges should register with the agency and obey its rules. The SEC said in a blog post that many digital currency trading platforms may resemble regulated exchanges when in reality their standards and protocols have not been vetted by the SEC.

“To get the protections offered by the federal securities laws and SEC oversight when trading digital assets that are securities,” the blog post said, “investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system ('ATS'), or broker-dealer.”

Coinbase said Wednesday that it and its exchange GDAX are exempt from registration requirements under SEC guidance. “They do not list assets that could be considered securities, such as ICO tokens,” Coinbase said in a statement to The Washington Post. “As a company, we have always believed that consistent and clear regulation would only stand to benefit the growth of the cryptocurrency space and those that invest in it. We look forward to an ongoing conversation with regulators around this issue.”

Access to the Coinbase index fund will be limited at first. The company is opening the fund to U.S.-based accredited investors, meaning those who are worth more than $1 million or who earn more than $200,000 a year. And there's an initial hurdle of a $10,000 minimum investment.

Coinbase isn't the first to launch an index fund. Last year, another Bay Area start-up, Bitwise Asset Management, started its own fund known as HOLD 10, which tracks the performance of 10 cryptocurrencies. That fund rebalances every month and includes other popular alternatives such as Ripple and Monero.

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Brian FungBrian Fung covers business and technology for The Washington Post. Before joining The Post, he was the technology correspondent for National Journal and an associate editor at the Atlantic. Follow